Unlisted shares are simply those shares that are not listed on any of the capital markets.
These assets are, however, available on alternate platforms.
This article will tell you everything about these unlisted companies and how you can easily invest in them.
So, without delaying anymore, let’s get straight to it.
What Are Unlisted Shares?
Unlisted shares are Securities or financial products that are not listed on the stock exchange. They are traded in the over-the-counter(OTC) market and are called OTC securities.
The risk associated with investing in the stock market is comparatively lower than in the OTC markets because of the SEBI’s effective regulation, market pricing, and disclosure transparency.
However, there is no such openness or control in the unlisted space. Thus, investors must exercise thorough scrutiny before investing in this sector.
Types Of Unlisted Financial Securities
Financial instruments that do not meet listing standards are not traded on a formal exchange.
Unlisted securities are typically issued by smaller or newer companies that cannot or do not want to adhere to official exchange rules, such as market capitalization limitations or listing costs.
Additionally, the business must have issued a certain number of shares and should be able to pay for its listing on the exchange while it becomes public.
Sometimes, even the legitimate foreign corporations that don’t want to submit the SEC reports, don’t list themselves on the stock markets.
On the other hand, a nominal stock is frequently traded on the OTCBB or the pink sheets and is one of the most popular unlisted security. This includes penny stocks which can trade for meager prices.
Many non-stock, unlisted instruments, such as swaps, government securities, and corporate bonds, are also traded on the OTC market.
A Step-by-Step Guide To Investing In Unlisted Shares
The following seven steps can be used to breakdown the investment process for unlisted shares:
1. Demat and Trading Account Requirements
A Demat account and a trading account are required if it is your first time investing in unlisted shares.
You can use any CDSL or NSDL-registered trading and Demat account. However, you may not be able to purchase or sell unlisted stocks through the brokerage firm giving you the Demat account since they don’t deal in such stocks.
The nation’s two depositories, CDSL and NSDL, play a vital role in this situation. The equities are sent to your Demat account when you purchase unlisted securities.
You can even use MyEasi App from CDSL or the NSDL application to check the same.
2. Select the Best Intermediary
The next stage is selecting the ideal intermediary, which is one of the most vital steps throughout the entire process. You can buy unlisted stocks from a variety of intermediaries. These are:
- PMS businesses
- Promoters\sEquity Investors in crowdfunding platforms/Angel Funds
- Workers that are currently working for the company and have ESOPs
Brokers who deal in these shares are the most convenient way to invest in unlisted shares, as they are easily accessible.
These brokerage firms purchase the shares from businesses looking to sell their stock. Then they offer the shares for sale to buyers, assist in buying and selling shares, and monitor the price of these unlisted shares.
3. Stock Evaluation
You must have faith in these brokers because you cannot find the price of these shares online or at an exchange. These brokers impose a set of fees in exchange for their services.
From one broker to the next, the fees differ. So you must contrast the prices and the services they are offering. You should also find out which unlisted shares they are dealing in.
4. Negotiation Placement of an Order
Unlisted stocks are traded over the counter. So, if you want to invest in them, you’ll need to negotiate the price with the intermediary.
Next, you can bargain for a lower price or purchase the shares, for example, at Rs. 120 per share.
The middleman will come back to you if the cost falls below Rs. 100, and you can easily complete the transaction. Like buying, you can also hold off on selling your shares until they reach your desired price.
5. Order Placement
Orders include the number of shares you want to buy or sell as well as the price at which you wish to do so.
The intermediary will then assess the order before processing it. Orders can be placed over the phone, or you can call the middleman (or send them a letter) and give all the information. Let’s have a look at the list of documents mandatory to complete the order.
6. Submission of Documents Required.
For both purchasing and selling shares, the following paperwork is needed:
- Pan Card
- AADHAAR CARD
- Client’s Master Copy
- Canceled Cheque
In addition to the paperwork mentioned above, the Delivery Instruction Slip (DIS) is needed to sell the unlisted shares.
CMC is a document that contains the instructions on the number of shares being purchased, the price per share, and the overall sum.
Similarly, the number of shares you intend to sell, the asking price, and the total sale proceeds are all mentioned in DIS. The intermediary/broker provides both of these documents.
The penultimate step, which involves the transfer of shares and payment, is in your hand as you have to make the payment next.
The middleman will begin processing your purchase once they have received the payment. The shares will be in your Demat account within a couple of working days.
In order to sell these shares, you must first transfer them to the intermediary’s account or directly to another investor’s account, who will then deposit the proceeds into your bank account.
The transaction is finalized when you receive the shares, while you buy them, or the money, when you sell them.
Ways to Invest in Unlisted Companies
You can participate in a private firm before its Initial Public Offering (IPO) by purchasing its unlisted shares. The expected gains are one of the primary reasons investors purchase these shares.
Companies provide discounted prices on these shares to get investors to buy a substantial portion of their unlisted shares. The cost of these shares will likely rise during the IPO, thus making the early investors wealthy.
Since unlisted shares may only be transferred electronically, everyone who wishes to buy them must have a Demat account. This guarantees corporate sector openness, investor protection, and governance.
Let’s see the different ways to invest in unlisted companies.
1. Through Middlemen and Startups
Online unlisted share purchases are typically an option for entrepreneurs. They generally offer their equity over their websites.
Usually, a minimum of Rs. 50,000 is mandatory to be a part of the company at such an early stage. However, this depends solely on the company.
The only time I’ve bought unlisted shares of a company was through Dezerv. The shares I bought belong to a company called boAt.
2. Through Employees
Most private companies offer their workers stock ownership plans (ESOPs) to retain them and give them a sense of ownership. So, these unlisted shares are also available to the employees.
This means that you can simply ask your friends or relatives to get you the shares of such companies..
3. Through Financial Institutions
As unlisted shares are inexpensive, financial institutions invest a lot of money in them. An investor with significant capital and a high-risk tolerance thus typically invests in unlisted shares through a financial institution.
4. Platforms For Crowdfunding
This is a common practice in startups since it enables a sizable group of investors to pool their resources and finance startups in exchange for a percentage of their unlisted shares. These investors later fund these companies in exchange for the equity.
How To Choose Unlisted Companies
Different ways exist to select the most ideal way to invest in unlisted companies. Check them out below.
1. Investigate Futuristic Industries
This still stands as the primary motivation for investing. Find tomorrow’s industries to invest in. Typically, there aren’t many companies in the market, and they’re still in their infancy.
Gaming, SaaS, Fintech, e-commerce, and other well-known industries have been included in the trending list of investments throughout the years.
2. Find Out Who Has Already Invested
You can locate businesses where some well-known founders of successful startups are re-entering markets they support. If you like, you can also check out which prominent business tycoons have invested in them.
The majority of the time, these angel investors have a knack for finding firms that will become hugely successful in the future. In addition, they have an entire team of investors that conduct all the necessary due diligence to guarantee that their investments are in good hands.
3. Companies On Their Way To Going Public
Companies close to going public may still have a competitive advantage over their issue price. However, this is merely one of many benefits. Most of these businesses have previously published their DRHP.
These records, often known as holy grails, contain all the pertinent information regarding the company. Additionally, they are handled professionally and are subsidiaries of previously listed businesses.
Liquidity is a crucial factor while searching for unlisted companies. Liquid companies typically have a large number of interested investors and significant trading volumes.
5. Pre IPO Investment
Purchasing or selling company shares before the company’s initial public offering (IPO) occurs in the pre-IPO market. There is no stock exchange where you can buy these shares because they are not traded in the open market.
Unlisted shares can be purchased through intermediaries and platforms that specialize in locating and putting unlisted shares on the market. In addition to buying shares from existing and eager new investors, intermediaries and platforms also offer employee stock option Plans (ESOP).
The pre-IPO market has opened up recently and is now accessible to the general public. There are online marketplaces where investors can purchase unlisted shares from companies, including Analah Capital, TradeUnlisted, and Unlistedkart. Shares of these unlisted businesses are kept in a Demat account.
The minimum amount of this investment might range between Rs.25,000 and Rs.50,000, according to Unlistedkart, depending on the unlisted share. Other investment platforms haven’t referred to a minimum investment requirement.
All pre-IPO shares are restricted for six months following the date of listing, and following the regulations of India’s market regulator. It indicates that you cannot sell equities before six months have passed after the listing date.
Short-term securities are unlisted securities that are sold in less than 24 months. The gains are taxed at a tax slab rate that applies to you and to the person’s income. After indexation, the tax rate on long-term capital gains, if sold after 24 months, is 20 percent.
It’s essential to remember that unlisted shares are unstable and illiquid, so you might not be able to sell them quickly. Since institutional players predominate the pre-IPO market and their transactions tend to be slower, selling shares and obtaining cash at any hour of the day is challenging.
The Drawbacks of Buying Shares of Unlisted Companies
Purchasing unlisted shares is not a surefire road to success. Every currently unlisted company does not necessarily need to be a wealth producer.
As there is little information available, determining the fair value of shares of unlisted companies is also quite tricky. Also, purchasing shares in an unlisted company also carries some inherent risks.
Even when you go on to sell the shares of such corporations, it may prove difficult if an unlisted company does not become listed shortly. In other words, there can be liquidity issues.
Shares of businesses that do not trade on reputable stock exchanges are taxed at a higher rate, reducing your profit margins. Furthermore, keeping these shares in a Demat account also carries a good enough cost.
If you have been in the stock markets for some time, you must be aware of the risk potential in such assets. Although the stock markets are safe and do not include scammers, it has its own regulatory body, SEBI.
Buying unlisted shares might pose a risk to retail investors and traders, as they face many scams. This is because these shares are not regulated by SEBI.
So, you can think of this in two ways: You are in love with this unlisted company and know all the fundamentals, or you can choose to invest only that much which you can afford to lose. Hope now you know the A to Z of investing the shares of unlisted companies in India.